October 31, 2018 – Gastar Exploration (OTCQB: GSTC) and one affiliated Debtor (together, the “Company” or “Gastar”) filed for Chapter 11 protection with the U.S. Bankruptcy Court in the Southern District of Texas, lead case number 18-36057 [Docket No. 1]. The Company, a pure play Mid-Continent independent energy company engaged in the exploration, development and production of oil, condensate, natural gas and natural gas liquids in the United States, is represented by Matthew D. Cavenaugh of Jackson Walker. Further board-authorized appointments include Kirkland & Ellis as counsel, Opportune as restructuring advisor and Perella Weinberg Partners as financial advisor. According to documents filed with the Court, the Company has between 10,000 and 25,000 creditors; estimated assets of approximately $341,500,000; and estimated liabilities of approximately $453,800,000.

Restructuring Support Agreement

On October 26, 2018, Gastar announced that it had entered into a restructuring support agreement (the “RSA”) with the Company’s only funded-debt creditors and largest common shareholders, certain funds affiliated with Ares Management LLC (collectively, “Ares”) which holds approximately 25.9% of the Debtors’ voting equity. Subject to the terms and conditions of the RSA, Ares has agreed to support the Company’s restructuring, which is expected to leave trade creditors and other operational obligations unimpaired, eliminate more than $300 million of the Company’s funded-debt obligations and preferred equity interests (OTCQB: GSTPA and GSTPB), cancel existing common equity interests, and provide $100 million in new, committed financing.

Prepackaged Plan of Reorganization Terms

The prepackaged Chapter 11 Plan includes the following terms as to projected creditor recoveries:

Holders of administrative and priority claims, as well as general unsecured claims, will be paid in full in cash

Amounts outstanding under the Company’s debtor-in-possession (“DIP”) financing (to be provided by Ares) will roll over into a new exit facility, with undrawn commitments remaining available to the Company

Prepetition hedge fund counterparties will be paid in cash in equal monthly installments through December 2019

Ares will receive $200 million in new take-back term loans and 100 percent of the common equity of reorganized Gastar (subject to any warrants for current equity) as a result of their obligations under the Company’s DIP financing and first lien term loan and all of the Company’s second lien convertible note obligations

Holders of existing preferred and common equity will together receive new warrants exercisable for up to 5% of the common equity of reorganized Gastar; so long as they do not object to, or otherwise attempt to interfere with, the Company’s restructuring.

Events Leading up to the Chapter 11 Petition

In a declaration in support of the Chapter 11 filing (the “Gerlich Declaration”) [Docket No. 15], Michael A. Gerlich, the Debtors’ Chief Financial Officer, noted, “The market difficulties faced by the Debtors are consistent with those faced industry-wide…..However, independent oil and gas companies have been especially hard-hit, as their revenues are generated from the sale of unrefined oil and gas….The Debtors were not immune to these macro-economic forces.”

These macro-economic forces were further exacerbated by the failure of a Joint JV following a disastrous switch to a new completion provider and fracking method. The Gerlich Declaration continues, “In late 2016, the primary oilfield services completions provider for the Debtors and the DrillCo Venture elected to cease operating in the area. As a result, completion costs significantly increased due to fewer completion service providers in the area. The Debtors switched to a different completion provider and transitioned to a fracking method that eliminated a number of special additives, which was not anticipated to affect production performance….These operational changes resulted in a marked decrease in well production performance….Due to the decrease in production performance, coupled with higher drilling and completion costs, the DrillCo Partner exercised its right to terminate the DrillCo Venture in July 2017, after the initial 20 wells were drilled. Without the participation of the DrillCo Partner (who bore 90 percent of the costs), the Debtors were forced to proceed with their drilling program…without a partner to pay a promoted share of the drilling and completion costs for the next 20 well tranche….The termination of the DrillCo Venture meant that the Debtors went from bearing 10 percent to 100 percent of the cost for any previously budgeted future second tranche wells….In mid-2017, the Debtors…corrected their drilling and completion technique deficiencies, and resumed limited operated drilling activities. While the Debtors were ultimately able to achieve the production levels consistent with what they had modelled…they were only able to do so through substantially higher-than-projected capital expenditures. The resulting capital burn was nearly $90 milliongreater than originally projected.”

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